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Tuesday, October 30, 2012

Why AT&T and Verizon Fear Softbank

As discussed previously, there is a shake-up underway in the U.S. mobile provider market. Japan's Softbank taking a 70% majority position in Sprint Nextel (NYSE: S) is just step one in its plan to shake the complacency out of the two leaders in the industry domestically, Verizon Communications (NYSE: VZ) and AT&T (NYSE: T).

Another part of Softbank's plan was revealed recently when Sprint resumed majority control of Clearwire (Nasdaq: CLWR). It bought a 4.5% stake in Clearwire from Eagle River Holdings LLC, the investment vehicle of Clearwire founder, Craig McCaw. This additional stake gave Sprint a 50.8% controlling interest in Clearwire.

With Clearwire's stock falling upon announcement of this transaction, it was clear that its shareholders were disappointed that Sprint did not launch a full takeover offer for the company. At the moment, Sprint with its own heavy debt burden - $4 billion due next year – does not want to consolidate Clearwire onto its balance sheet with Clearwire's $2.9 billion of debt due in 2015.

But shareholders should be patient. It is highly likely that once the Softbank–Sprint deal is finalized, a full takeover of Clearwire will be at the top of the agenda. Sprint's current arrangements give it full access to Clearwire's wireless spectrum through only 2014.

Softbank's Agenda

Why will Clearwire be at the top of Softbank's agenda? Because without it, Sprint will always be a very distant third in terms of spectrum behind both Verizon and AT&T. With it, according to the Financial Times, Sprint will control more spectrum in the 100 largest U.S. wireless markets than Verizon and AT&T combined! With the advent of data-eating smartphones and tablets, spectrum is needed in order to build networks that are both fast and reliable.

In addition, Clearwire uses a form of 4G LTE technology, TDD-LTE, which is different than Sprint's version. However, it is the same technology that Softbank has used very successfully in Japan for years. Sprint does say phones which work on its network will also work on Clearwire's planned 4G network.

Both Verizon and AT&T are well aware of the potential that a Sprint-Clearwire combination, backed by Softbank's financial muscle and acumen, has. They do not favor having a strong new competitor in the market they now control. That is why AT&T already is raising objections to the deal. It has called on regulators to scrutinize Softbank's plan for the U.S. mobile market very closely.

There is one possible hiccup, from a technology standpoint, to Softbank's plan. Clearwire's spectrum is in a higher frequency range than the more desired lower frequency ranges owned by Verizon and AT&T. Higher frequencies do not penetrate obstacles such as buildings as well or travel as far. This means that in urban settings more cell towers may have to be built. Softbank can finance such an undertaking. . .but it may actually be harder getting local approvals to build additional towers in certain locations across the country.

The Future

What's next in this telecoms soap opera? AT&T and Verizon know how Softbank came from a very distant third in the Japanese market to today rival the big two players in that market. They see that Softbank has a bold vision for the U.S. market as well. Look for both to push U.S. regulators very hard to block the deal. In the spirit of competition and for the benefit of consumers, hopefully that does not happen and a strong, viable third mobile provider is allowed to happen.
This article originally appeared on the Motley Fool Blog Network. Please read all of my articles for the Motley Fool at http://beta.fool.com/tdalmoe/.

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About Me

Nearly three decades of experience in the investment industry. Spent 18 years with Charles Schwab, as a representative and trading supervisor, with both Series 7 and Series 8 licenses.
After leaving Schwab, began to write freelance article on the markets and investing.
Currently write articles for the newly launched Motley Fool Blog Network website - http://blogs.fool.com/tdalmoe/
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